The Reserve Bank of Australia recommends banning surcharges on credit and debit card payments, calling to end a practice worth $1.2 billion to the merchants who pass card acceptance costs onto customers.
In a long-awaited consultation paper, released Tuesday morning, the RBA calls for changes that would effectively thrust the cost of card acceptance onto small businesses.
But the RBA says new caps on interchange fees — the costs passed between a merchant’s payment services provider (PSP) and the customer’s bank — would “outweigh any loss in surcharging revenue for most small merchants”.
The reforms could also push PSPs like Square and Zeller to detail how different payment types are packaged in all-in-one ‘blended’ transaction fees.
The central bank argues greater transparency over how merchants are charged could encourage small businesses to seek a better deal.
Current framework no longer fit for purpose
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The consultation paper argues Australia’s surcharging framework, which currently allows merchants to pass on the cost of processing debit and credit transactions to consumers, “is no longer achieving its intended purpose”.
Originally designed to encourage lower-cost payment options, the RBA found Australia’s declining cash usage and preference for card transactions has weakened the surcharging system.
At the same time, plans allowing merchants to pay a flat fee when processing multiple payment types, and difficulties enforcing current surcharging regulations, have challenged rules in place since 2003.
The RBA’s Payment Systems Board’s (PSB) preferred reform option is to remove surcharging on designated debit and credit card networks altogether.
Doing so “would best promote the public interest by enhancing competition and efficiency in the card payments system,” it said.
Without the ability to directly hand the cost of card payment acceptance on to consumers, merchants would be more likely to seek out cheaper options, according to the paper.
Filling the gap left by a surcharge ban
The RBA recognises that simply banning surcharging would force merchants to absorb those fees in their margins, or pass them on to consumers in the form of higher prices.
To counteract this, the RBA recommends lowering the caps on domestic interchange fees, and establishing new caps on international interchange fees.
Those new and adjusted caps would result in smaller costs borne by PSPs, and the RBA expects those PSPs to “fully pass on” any benefits to merchants.
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The RBA estimates those lower wholesale card costs would reduce merchant costs by $1.2 billion per year — the same amount consumers are expected to save through the surcharge ban.
About 90% of Australian businesses would benefit from that reform, the paper estimates.
Smaller merchants would reap the most rewards from those new caps, the RBA says, as they are often subject to higher interchange fees than larger merchants, which can negotiate better volume rates.
Those small businesses would be $185 million better off each year under the proposed reforms, according to the paper.
The central bank considered a surcharging exemption for small businesses, but found it would only complicate the system.
“The PSB considers that simplicity and ease of enforcement for consumers, merchants, payments service
providers and the ACCC outweigh the potential benefits of exceptions to removing surcharging,” it said.
Surcharges beyond card fees — like extra charges on weekends or public holidays — are unaffected by the RBA proposal.
Fintechs consider RBA findings
The RBA argues increased transparency around payment costs will help small merchants find and compare payment acceptance plans that could better suit their needs.
However, that reform would challenge PSPs which bundle the costs of all payment types under one simple transaction fee.
Some of those providers have “gone beyond the spirit of the regulations” by including the cost of extra services — like inventory management and data analytics — into their transaction fees, the RBA said.
“These services are designed to support the general business operations of the merchant and are not
related to the merchant’s cost of acceptance of a given payment method,” it said.
The PSB also suggested PSPs that bundle payment costs with extra features could introduce a “user-pay” model, separating card acceptance from broader offerings.
Around 39% of merchants used single-rate plans in 2024.
Providers like Square and Zeller have long argued that merchants appreciate the simplicity of those bundled fees.
Marco Lamantia, executive director of Square Australia and Japan, told SmartCompany a blanket ban on surcharging is the “most practical and balanced outcome for small businesses and cardholders alike”.
He said the measure would “level the playing field” between fintechs and the big banks.
But Lamantia defended the bundled fee model as an option for small businesses.
“Sellers, particularly smaller sellers, really value simplicity, convenience and speed, and also broader tools and services that can help them run and grow their business,” he said.
“It’s important that PSPs, or fintechs such as Square are actually providing value to these sellers beyond the cost of payment processing.”
Square intends to liaise with the RBA through the remainder of the six-week consultation period, before the central bank hands down its final views by the end of 2025.
